Inventory management in the public sector: a diagnosis of 
          the inventory management in a Brazilian public warehouse 
          and proposal of materials classification using utility theory 
                             and ABC curve 
                                     
                                     
                          Anna Paula Galvão Scheidegger 
                          Universidade Federal de Itajubá 
                                     
                               Fabio Favaretto 
                          Universidade Federal de Itajubá 
                                     
                              Renato da Silva Lima 
                          Universidade Federal de Itajubá 
                                     
                       João Batista Turrioni (joabatu@gmail.com) 
                           Universidade Federal de Itajubá 
                                     
                                     
         Abstract 
         Considering the inefficiencies found in the Brazilian productive sectors, particularly in the public 
         sector and inventory management, this work analyses the inventory replenishment process of a 
         public warehouse. The paper also proposes a multiple criteria materials classification based on 
         utility theory, which points to a better organization and inventory control. 
          
         Keywords: Inventory management, Public sector, Utility theory 
          
          
         Introduction 
          
         According to Mascarenhas et. al (2005), Bravo and Mariano (2006), since the early of 90s, the 
         Brazilian public organizations has been undergoing transformations that seek to modernize and 
         restructure their  management models, aiming efficiency and quality in service delivery, with 
         optimization of public spending. Public institutions began to incorporate management methods 
         from private sector (Bresser-Pereira 2008). However, according to Kovacic and Pecek (2008), 
         process  innovation  in  the  public  sector  still  focuses  largely  on  improvements  related  to  the 
         elimination of bureaucracy and simplifying processes. 
             As stocks are a substantial portion of the assets of organizations, they can (and should) be 
         seen as a potential factor in the optimization of public resources used, and in cost reduction 
         (Martins  and  Alt  2011).  However,  knowing  how  and  when  to  replenish  each  material, 
         considering  possible  variability  to  which  the  organization  is  subject,  becomes  an  extremely 
         complex task, since the lack of an essential material may do more harm to the organization than 
         the  maintenance  of  a  minimum  stock  of  the  same  (Gutiérrez  and  Vidal  2008,  Santos  and 
         Rodrigues 2006).  
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          In  this  scenario,  inventory  management,  one  of  the  oldest  questions  of  production 
       management, still arouses much interest both in organizations and academia (Gomes and Wanke 
       2008, Garcia and Ferreira Filho 2009). However, Kovacic and Pecek (2008) emphasize that 
       public  sector organizations  face different challenges  from those  faced  by  private companies, 
       since they need to fulfill multiple, often conflicting goals, and are subject to financial, legal, 
       contractual, staff and institutional nature restrictions. Thus, an analysis of inventory management 
       applied in this context becomes relevant. 
          In addition, Lourenço and Castilho (2006) mentioned that most organizations work with a 
       wide range of products and give the same degree of attention to all items is not a recommended 
       practice, given the peculiarities of each material. Thus a suitable type of control for a product 
       may be inappropriate to another and, therefore, the materials classification becomes important 
       for proper inventory management. 
          Thereby, the questions that guide the development of this research emerge: (i) "How is 
       currently made the materials management and more specifically, the inventory management in 
       the Brazilian public sector?" (ii) "Which theory can be used to classify the materials based on 
       multiple criteria?" (iii) "Which criteria should be applied in the materials classification, in order 
       to treat them differently?". 
          To answer these questions, this paper seeks to diagnose the materials management in an 
       object of study of the public sector and to propose, based on multiple criteria, classification of 
       materials, given the particularities of the sector and each material. 
          As an object of study, it was adopted the warehouse of a University. This choice is 
       justified, since the warehouse of the institution has recently undergone a process of restructuring, 
       changing the unit manager and implementing a new integrated management system. Moreover, 
       after  some visits to the warehouse, examples of materials without moving, overdue and / or 
       obsolete  were  observed  and  there  were  reports  about  situations  of  lack  of  material  in  past 
       periods. These conditions show problems in the inventory management of the institution. 
          The  article,  besides  the  introduction  already  presented,  is  structured  in  more  four 
       sections. In the next section is laid a theoretical foundation of inventory management, then the 
       research  method  adopted  is  described  and  the  results  of  the  research  are  presented.  Finally, 
       concluding remarks are made. 
           
       Theoretical foundation 
        
         Inventory management 
        
       The inventory management is regarded as a key element for the reduction and control of total 
       costs and improvement of the level of service provided by the companies (Wanke 2004). For 
       Roy (2012), the area plays very important role in the overall cost of operations and supply chain 
       of any business big or small. 
          For  Han  (2007),  inventory  is  used  as  a  cushion  against  the  supply  and  demand 
       uncertainties. In the same vein, for Khunagornniyomrattana et al. (2007), inventory is a double-
       edged weapon, since the lack of inventory leads to loss of productivity, while excess inventory 
       leads  to  loss  of  profitability.  Thus,  Oliveira  and  Rodrigues  (2008)  argue  that  inventory 
       management  has  direct  and  significant  effects  on  operational  efficiency  (performance)  and 
       company finances and Roy (2012) points out that an effective inventory management will always 
       give a competitive advantage to the business over its competitors. 
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          The inventory management aims to optimize the investment by maintaining adequate and 
       satisfactory levels of materials capable of meeting the needs of customers (Quirino et. al 2011). 
       To meet this goal, according to Chaharsooghi and Heydari (2010), managers need to find the 
       best answer to two questions: "How much to order?" and "When?". To answer these questions, 
       we must deal with the trade-off between the pursuits of cost minimization, while we are seeking 
       the satisfaction of service levels (Aloi et al. 2012). 
          In addition to this trade-off, with the increasing number of items with different demand 
       patterns and characteristics, complexity increases in material management. Thus, researchers and 
       managers must also deal with the challenges of considering the particularities of each material 
       and each organization, and manage the different sources of uncertainty, as shown by Santos and 
       Rodrigues  (2006),  Altug  and  Muharremoglu  (2011),  Alem  and  Morabito  (2012).  Moreover, 
       according to Santos (2006), the government sector needs more efficient inventory controls. 
          In  this  context,  present  a  materials  classification  to  their  characteristics  is  of  utmost 
       importance for more efficient and effective inventory management. 
           
         Materials classification 
        
       Lopes et al. (2006) argue that there may be low consume materials  that are essential to the 
       continuing of organization activities and, therefore, the cost of their lack, may be more costly 
       than the investment to keep their in stock. Thus, one must consider, in addition to consumption, 
       other factors such as difficulty in acquiring the material, supply lead time, volume required for 
       storage, costs, etc... Therefore, a materials classification based on multiple criteria may assist in 
       this matter. 
          One of the most popular methods for materials classification is the ABC curve,  also 
       known as Pareto law, which rests briefly on the fact that there are few critical materials and 
       many  insignificant.  Other  methodologies  available  for  sorting  of  materials  are  Analytic 
       Hierarchy Process, Analytic Network Process, Krajilic’s Matrix, Utility Theory, among others. 
           Gaither and Frazier (2002) state that one of the most frequently used criteria in the ABC 
       classification is valued demand or inventory value, which represents the unit investment of each 
       product multiplied by its demand. However, as already mentioned this method may overlook 
       other important factors and therefore it is suggested the adoption of multiple criteria. Roy (2012) 
       indicates other criteria and parameters to be used in the materials classification, such as: material 
       importance,  price,  material  turnover,  difficulty  of  supply,  stability  of  demand  over  time, 
       durability, substitutability and reparability. 
           
       Research method 
        
       Regarding the methodological framework, the scientific research can be classified according to 
       its goals, nature, way of approaching the problem and research method. 
          As to its nature, the research can be classified as applied which according to Marconi and 
       Lakatos (2010) studies a problem concerning the applicability of scientific knowledge. 
          Regarding  its  objectives,  the  work  has  an  exploratory  character,  since  there  are  no 
       hypotheses to be tested. Rather, the study seeks a better understanding of the current context 
       (Cervo and Bervian 2002). 
          We  opted  for  the  use  of  the  qualitative  approach,  where  the  subjective  reality  of 
       individuals  involved  is  considered  relevant  to  the  development  of  research  (Martins  2010). 
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       Because of this characteristic of subjectivity, qualitative approach is often criticized. However, 
       Cooper and Schindler (2011) claim that when conducted with methodological rigor, it is possible 
       to achieve valid and reliable results. 
          Finally, regarding the research method, it was adopted the case study. According to Yin 
       (2010) the case study is used to examine contemporary events and can handle a wide variety of 
       evidence (documents, interviews, observation, etc.). Moreover, according to Voss et al. (2002), 
       the  case  study  enables  to  answer  questions  such  as  "Why?",  "What?"  and "How?" with  full 
       understanding of the nature and complexity of the phenomenon. Also according to Voss et al. 
       (2002), the use of single case study limits the generalizability of the research findings and the 
       development of new theories, in addition to increasing the risks related to subjectivity in data 
       interpretation.  But  on  the  other  hand,  has  as  advantage  the  opportunity  to  make  deeper 
       observations about the object of study. As this paper does not have as goal the development of 
       new theories, but instead aims to verify how is the application of existing theory in practice, the 
       single case study was adequate, despite its aforementioned limitations. 
           
       Development 
        
         Object of study 
        
       In  order  to  carry  out  the  case  study,  interviews  were  conducted  with  supervisors  of  the 
       procurement and warehouse department at University and warehouse keepers, on-site visits were 
       made and documents were analyzed. 
          The university, located in the southern of Minas Gerais state, Brazil, is considered the 
       first technological university, was the tenth engineering school in the country and has just turned 
       100 years. Over the past 10 years, as part of the Brazilian government's program of expansion of 
       Universities, the total number of students increased by about 3 times, bringing the total to 7,455 
       students in 2012, while the total number of employees has doubled, totaling 827 employees. Still, 
       because of the expansion, spending on permanent materials and consumables increased by about 
       2 times, totaling approximately R$147 million. This growth has increased the complexity of 
       inventory management at the University, also aggravating old problems, as will be discussed in 
       the next sub-section. 
          As part of the plan to improve its internal processes, the University bought an integrated 
       management system, developed by other Brazilian university considering the particularities of 
       this type of organization and the legal requirements. Thus, in the beginning of 2013 the new 
       system was implemented at the University and the inventory problems were highlighted. 
          For this study, it will be considered only the consumables under the responsibility of the 
       city  hall  of  the  University  campus.  I.e.  permanent  materials  or  consumables  under  the 
       responsibility of other departments will not be analyzed. 
        
         Diagnosis of the inventory management  
        
       According to the visits and interviews conducted and as part of the observation, it was found that 
       the  university  has  been  using  unscientific  inventory  control  and  storage  methods  and 
       management models. 
          The inventory records were not properly made, with constant differences between the 
       sheet stock in the warehouse and the system logs. These divergences are due to, among other 
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